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Traders Are Focused On The Bank Of England's Rate Decision


4 November 2021 Written by Naeem Aslam  AvaTrade Chief Market Analyst Naeem Aslam

Futures in the United States are flat, while those in Europe are up, following the Fed’s announcement that it will begin tapering its massive stimulus programme later this month. Stock markets soared on the news, as the Federal Reserve appeared dovish about the pace of tapering, which is expected to take until the mid of next year. The Dow Jones Industrial Average hopped by nearly 100 points, while the Nasdaq jumped by nearly 160 points. Investors will be digesting the Bank of England’s monetary outlook today, as well.

In yesterday’s session, the Dow Jones Industrial Average surged 0.29%, while the S&P 500 index jumped 0.65%. The Nasdaq, the tech-savvy index, gained 1.04%.

Stock Market

Yesterday’s announcement and commentary by the U.S. central bank is important because it signals that the American economy is in good shape and can withstand a winding down of the Fed’s quantitative easing programme. In other words, the economy is ready to stand on its own two feet.

The massive stimulus, in the form of $120 billion of monthly bond purchases, helped the United States to survive the harsh pandemic era environment, which was infested with national lockdowns and packed hospitals.

However, now, thanks to the introduction of effective vaccines, the risk of Covid-19 spreading to the same extent seen in 2020 is likely very low. Credit should also be given to Fed officials for carefully directing market sentiment and avoiding the much-feared taper tantrum witnessed in 2013.

Investors should keep in mind that although the Fed is going to start tapering, the actual pace of tapering is slow. The purchase of bonds will be reduced by $15 billion per month. This pace tells us that economic recovery still has a long way to go, with Americans facing multiple issues such as supply chain bottlenecks, rising commodity prices, and a looming global power crisis.

Overall, the third quarter has been very good for equities, with companies continuing to report strong earnings and the start of tapering signalling future economic strength. Moving forward, the American economy will need to show consistent signs of improvement so that investors are not thrown into a frenzy and can calmly adapt to a world without additional support and liquidity from central banks around the globe.

Economic data

The U.S. weekly unemployment data is to be released today. The expected number of jobless claims is 275,000, while it was 281,000 last week. Similarly, the payrolls data is also scheduled to be released tomorrow. The expected number of jobs added is 450,000. During the month of September, the actual jobs added were 194,000, which was drastically lower than the projected 500,000.

Bank of England

Today is an important day for the United Kingdom as the Bank of England (BOE) is set to meet and convey its monetary policy for the coming months. The BOE is expected to follow in the footsteps of the Fed and wind down its ultra-loose policies implemented to support markets in 2020. The important question is whether the central bank will hike its historically low policy rate. As per reports, officials are debating whether to pull the plug now or wait for the economy to show further signs of recovery and strengthening. Currently, we expect an interest rate rise of 15 basis points.

Over the last few months, inflation has been surging while economic growth has been slowing down. Investors should note that despite an overall upward trend of consumer prices, inflation in September came in at 3.1%, slowing down unexpectedly. However, moving forward, inflation is expected to continue rising.

In August, the United Kingdom saw its steepest incline in consumer prices, of 3.2%, significantly above BOE’s 2% target. Similarly, the state of the labour market is also tight, with markets facing labour shortages to help fuel growth. New job openings surged to 1.1 million in the three months ending August.

Cryptocurrencies

Traders should be ecstatic that funds are continuing to seep into the blockchain space, as is clear from the case of AscendEX. In its Series B funding round, AscendEX was successful in raising a shocking $50 million, driven by Hack VC and Polychain Capital. All in all, the company has raised $63 million to date. The company is working on optimising the investing experience for leveraged trading. AscendEX has been operational for the last 3 years under the name BitMax.

Oil

Oil prices are declining, with oil futures in the United States falling below the $80 mark as markets anticipate the lifting of American sanctions on Iran. WTI crude slipped to $79.94, while Brent, the global benchmark, settled at $81.19 per barrel. Iran and the United States agreed to resume their nuclear negotiations in November. If sanctions are withdrawn, global oil supply could potentially rise. Today, investors will be looking at crude oil inventories to see how demand for oil has changed over the last 7 days.

Gold

Prices of the precious metal rebounded after the Fed’s meeting yesterday, which took a more dovish stance on tapering. An aggressive approach would have meant a quicker interest rate hike, which is bad for gold, as lower interest rates reduce the opportunity cost of taking exposure to the yellow metal and make it more appealing to investors. The dollar index also took a beating and dropped 0.2% and is currently near 93.847. Gold tends to move in the opposite direction of the dollar index.

Asian Pacific Markets

Chinese markets are facing a selling spree of junk rated bonds, which a few months ago seemed to be an appealing investment. However, the Evergrande situation has stirred up panic among investors who are now hesitant to take exposure to risky assets. An index measuring China’s junk rated bonds slumped nearly 26% in about 5 months. As of 12.55 a.m. EST, the Nikkei rose 0.73%, and the Shanghai index climbed 0.64%. The Hang Seng index, in Hong Kong, jumped 0.27%. The ASX 200 index soared 0.31%, and the Seoul Kospi rose 0.44%.

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